James McCabe: So we’re exiting breakeven in September. So yes, we expect to be breakeven to positive in Q3 and strong — solidly positive in Q4 to get back to the mid- to high single digits for the year.
David Strauss: And Jim, on free cash flow, I think if I go back to the bar chart that you had in the Q4 slide deck. It looks like Q2 was a little bit weaker than what you were anticipating there if I just compare it to prior years. If so, what was kind of where was the miss relative to your internal plan on cash flow? And that bar chart implied a pretty big Q3 free cash flow number? I know you said positive, but I just want to see if we could revisit kind of the sequential growth in free cash flow you’re expecting Q3 and Q4.
James McCabe: David, at the end of the fiscal year, we reported, we put out the chart with the cash flow cadence for the 4 quarters that you’re referring to. But actually, after Q1, I updated that, and I said $30 million to $40 million cash used, if you look at the transcript for Q1. And at the Investor Day, I reiterated that. And the real driver for a slightly higher cash use was the higher sales we’re seeing. There was some impact from supply chain and from demand changes. But it was really the higher sales for the second half. So $30 million to $40 million used — I guess we came in at $37 million used this past quarter, and we should be positive in that range for Q3 in the $30 million to $40 million cash positive and then the balance to get to our full year guidance would be in Q4.
So very strong Q4 as we’ve had in prior years. But with this higher aftermarket percentage at 43%, with even more seasonality and with the ramping production rates I think we’re going to have a stronger Q4 than we’ve ever had before.
Daniel Crowley: And taken together, year-over-year, it’s a swing of about $120 million to $130 million in cash flow for the full year. So we feel very good about the trajectory on cash.
David Strauss: And Jim, just the net working capital that you’re assuming now for the full year, how much of use are you anticipating?
James McCabe: I don’t have a working out to that level. It’s obviously going to be coming down in the second half of the year. And I have to follow up on that and look forward to giving you more information about that moving forward to the absolute working capital level. I can tell you that we are driving turns down, and we have a concerted effort on inventory management to get the turns down to improve the working capital moving forward. And it’s the right time to do it with ramping sales because we have lots of inventory and we have lots of opportunities to be more efficient with it. We’re trying to find the right home for inventories, working with vendors and customers who may have lower cost of capital than us, for vendor managed inventory, customer-owned inventory. So the direction is positive, and we’re going to be liquidating working capital in the second half of the year.
Operator: And our next question comes from Cai von Rumohr with TD Cowen.
Cai von Rumohr: Impressive results. So your aftermarket business was strong in the second quarter and a very good sequential gain. Based on what you said about the year, it looks like the rate of growth in aftermarket sales will be much more modest in the third and fourth quarter. Could you give us some color on what you expect commercial and military aftermarket to do sequentially in the third and fourth? And if that’s the case, which it looks to be the mix would look like it would be a little bit leaner and yet your adjusted EBITDA numbers seem to assume very good margin improvement sequentially with a mix shifting towards more OE. Help us understand that, if you could.
James McCabe: Certainly, the commercial aftermarket is the strongest driver of the growth. We’ve seen outperformance year-to-date, and we expect that to continue in the second half. The visibility that’s not — it’s harder because you’re looking at market data. You’re not getting the actual orders in, it’s not a backlog business. We may only have 45 to 60 days worth of orders visibility for that. So I think there may be a little conservatism on what the mix will be. We know what OEM rates are, they can change, but the aftermarket mix I think it’s stable moving forward. Commercial is still strong. Military usually has a big surge in Q4. We see a lot of spares orders in our fiscal Q4. But we don’t provide guidance by market segment. We’d like to tell you the trends, but sometimes one segment outperforms that helps cover underperformance in other segment. That’s the benefit of our balance of diversification.
Cai von Rumohr: So basically, you’re saying that the mix should be the same going forward? Or is the mix shifting toward OA net-net?
James McCabe: I don’t think it’s going to shift towards OE because the aftermarket is stronger in the fourth quarter, in particular, both for military and commercial. So I guess they’re probably going to be more aftermarket in the second half of the year, but it depends on the OEM rate ramps. At the moment, I think aftermarket is probably going to overtake and continue to be stable to increasing as a percentage of our sales.
Operator: And our next question today comes from Myles Walton with Wolfe Research.
Myles Walton: So just actually a clarification on Cai’s question. So the Slide 8, is that referring to that 11% growth in fiscal ’24? Is that referring to the whole channel of MRO or the commercial channel in insulation?
James McCabe: It’s whole channel. So we have about $152 million, I think, of sales, and that’s the breakdown for the quarter of sales by aftermarket. It’s broken into third-party MRO where it’s not RIP necessarily and the spares, which obviously can be the highest margin. And then the third pieces are IT, which are higher margin typically than repairs on third party. On the bottom of that page, you can see we have the Q2 and the year-to-date breakdown for all those components.
Myles Walton: You mentioned the portal showing you 5.3% per month on the 77. Could you also share what it’s looking at for the 37. And maybe, Dan, that big growth you’re anticipating in Interiors, I imagine that’s primarily inflation driven on the 37. Is that correct?
Daniel Crowley: It’s one of the largest programs in Interiors for sure, but it’s certainly not the only one. We have A220 work out of Airbus. We do 787 work. So it’s a mix of programs, but it is the largest. On the OEM rates, Boeing has talked quite publicly about their step up to 38, whether it’s going to come in the calendar Q4, the following quarter. But we’re building at rates that are approaching that now, and we’re typically, on average, about 1 quarter setback from them. So as they ramp up, we’re already delivering into the pipeline, sometimes to intermediaries and then products that flow to Boeing. So our factories are building at rates of 30 to 35 a month right now. And in priming for rates that go up into 40 next year, or fiscal ’25. So that’s the general MAX-737 outlook for us. Airbus is a similar story. We’re building at rates that are in the high 40s and planning for rates for the 50s next year and 60s thereafter.
Myles Walton: And just one last quick one. When you mentioned portfolio actions in terms of pursuit of the balance sheet, improvement. Could you elaborate on the size of any potential turning you might be looking at or business lines that you might be thinking about from that perspective?
Daniel Crowley: We really can’t. It’s one of these things every year. We’re looking at every business, trying to make sure we’re managing the portfolio for shareholder value. But deleveraging is our top priority. Debt reduction — and so we’ve had inbounds for several of our businesses. And one of the challenges is because we’re on a ramp across OEM and MRO, what’s the value of these businesses. You could understand that people would come calling when the rates have been depressed and we’re on the sort of, I’ll call it, the base mountain climb of OEM and MRO rates. So people who have interest in these businesses have to properly value them, but we want them to be needle movers for deleveraging, not just around the margin.
Operator: Our next question today comes from Michael Ciarmoli with Truist.
